November 01, 2021


Every October the FRC release the findings of their corporate reporting review. Their review only covers IFRS however these insights can equally be applied to UK GAAP.

Find below our UK spin on the FRC’s top 10 points from October 2021 FRC Corporate Reporting review:

1. Judgements and Estimates

FRS 102 requires the judgements that an entity makes in preparing its financial statements to be explained, as well as, any areas of estimation uncertainty, that give rise to a risk, that a value in the financial statements may require material adjustment within the next financial year. This detail should not purely consist of narrative but also include a range of possible values based on sensitivity. Given the ongoing uncertainty of the economy, it would be worth giving this area some additional attention this year, as it would be reasonable to expect that, there would be more to say in this area in comparison to previous years.

The FRC has also highlighted the need to include judgements and estimates in connection with climate-related issues.

2. Revenue

The way in which each organisation recognises revenue will vary. Given the lockdowns, which hopefully remain a thing of the past, organisations may have altered their streams of revenue. The revenue accounting policies should be clear for each material line of revenue, set out the timing of recognition be that a point in time or over time as well as the value at which that revenue is recognised. Review your detailed P&L and ensure that your policy covers each stream.

3. Statement of cash flows

When talking to preparers it is common to find that the statement of cashflows is the least favourite statement to prepare. This highlights the need for additional attention and review of the statement. One area to focus on is the split of transactions between operating, financing and investment cash flows. One specific example given was and amounts borrowed from subsidiaries, which in the parent financial statements should be analysed as financing whereas it was often presented as an investing cash flow.

4. Impairment of Assets

Exhaustive disclosures are not required under FRS 102 for impairment, however, it is important that we fully review the possibility of there being impairment and ensure that this is consistently represented within the strategic report as well as the numbers. The pandemic may have given rise to a number of indicators that could suggest a need to impair the value of assets or stock.

Another area to consider is the decarbonisation movement. This may have an impact on the values within the financial statements, especially for those operating in carbon-intensive industries.

5. Alternative performance measures

Although it is positive that organisations report on additional materially relevant facts and figures outside of the requirements of FRS 102, when this is done, it is important that the calculations are adequately explained, so that the measure can be fully understood.

6. Financial instruments

Liquidity is always an important factor for a business, meaning that users of the financial statements need to be able to ascertain from the financial instrument disclosures, the funds available to the entity, their status be that, undrawn, drawn or committed as well as the main contract terms and conditions.

With the challenging economic environment, we are in there continues to be an increased possibility of breach of covenant. Where this occurs, and the position has not been rectified by the reporting date, disclosure should be provided.

7. Strategic Report and the Companies Act

We all know that narrative reporting is just as important as numbers. The strategic report should be used as a tool which to tell the story of the year and bring the numbers to life and in doing so ensure that a fair, balanced and comprehensive analysis of the business from both an operational and financial perspective is given.

This includes comments on the impact that organisation is having on the environment. The FRC have released a Climate Thematic report which focuses on how climate-related disclosures should be well linked into the financial statements. It would be worth reviewing this before preparing your strategic report.

Similar to last year a warning has been given with regard to dividends and distributable reserves. The Companies Act 2006 requires dividends to be paid out of distributable profits only. Organisations should be mindful that this years’ business performance may look very different to the performance of prior years, and where there is not a large balance of retained earnings it is important to ensure that the dividends declared remain legal at the point of payment. If this is not the case, the directors will need to make full disclosure in the notes to the accounts stating that the dividend was not supported which would then make it liable to be repaid.

8. Provisions and Contingencies

FRS 102 defines provisions as liabilities of uncertain timing or amount and contingencies as something which is dependant on the occurrence of future events. Generalising, provisions are recognised numerically in the financial statements whereas a contingent liability is only disclosed. We need to be mindful of the difference from a recognition perspective and ensure that we have hit the right bar before including a provision in the financial statements. When reviewing this we must also consider the narrative disclosures at the front end of the financial statements to ensure that there is a consistent message being represented.

9. Leases

Disclosure of lease arrangements are currently falling short of the mark. When drafting your lease disclosures ensure that all terms and conditions of the arrangements are set out and can be fully understood by a reader so that a true and fair view is given.

10. Income Tax

Although this is hard to gauge from reading the financial statements alone, the FRC have challenged whether or not deferred tax assets remain recoverable, particularly when there have been losses during the year. When reading through the financial statements think about this and assess whether or not further disclosure is required to make it clear as to why the deferred tax asset should continue to be recognised.


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